Problem 2 Suppose you are interested in futures contract of a stock which pays dividendscontinuously at a dividend yield of 5% per year. The stock is currently selling at $30, andeach futures contract is on 50 shares of stock. Moreover, the annual interest rate is 10%compounded annually. If you observe that the futures price with delivery date 1 year fromnow is $32 (per share of stock), is there arbitrage opportunity? If there is, construct astrategy to earn risk-free profit.

Dividend yield = 5%Current stock price = $30Contract size = 50 sharesAnnual interest rate =…

Answered: Problem 2 Suppose you are interested in…

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

See similar textbooks

Similar questions

F2 please help....
12. Assume BBB stock price is currently $20. In each six-month period, it will either fall by 50 percent or rise by 100 percent. What is the current value of a one-year call option with an exercise price of $15? The six-month risk-free interest rate is 5 percent per six-month period. [Use the two-stage binomial method.]
5. Suppose the one-year futures price on a stock-index portfolio is 1218, the stock index currently is 1200, the one-year risk-free interest rate is 3%, and the ybar-end dividend that will be paid on a $1,200 investment in the index portfolio is $15. a. By how much is the contract mispriced? b. Formulate a zero-net-investment arbitrage portfolio and show that you can lock in riskless profits equal to the futures mispricing. Assume a zero bid-ask spread in security and futures transactions. Now assume that if you short sell the stocks in the index portfolio, the proceeds are kept with the broker, and you do not receive any interest income of the funds. Is there still an arbitrage opportunity (assuming that you don't already own the shares in the index)? d. Given the short sale rules, what is the no-arbitrage band for the stock-futures price relationship? Specifically, how high and how low can the futures price be without giving rise to arbitrage opportunities. C.
Paragraph Styles a) If your firm has a payment of 100 million euros due one year from now, how would you hedge the FX risk in this payment with 125 000 euros futures contracts? I
A put and call on the same underlying share each have strike price 25 and expiry date 2 years. Which portfolio will give a payoff-IS(2)-25), where S(2) is the price of the stock in 2 years. Select one: O a. going long one put and long one call O b. going short one put and long one call Oc. going long one put and short one call Od: going short one put and short one call
6.Assume we have the following information: Spot price : 1146.00 Actual futures price : 1192.50 Theoretical futures price : 1160.00 Maturity : 3 months a. Is the futures fairly priced? Suppose an arbitrageur wish to take advantage of this opportunity. He has RM10,000,000.00 which he can fund at the current risk-free rate of 5%. b. What should he do? c. How many contracts should be shorted or bought? d. Assume that the arbitrageur maintains this position until contract expiry at which time futures and cash prices have converged to 1165. How much profit would he makes?
3
6(b) Suppose that a futures price is currently £30. The risk-free interest rate is 5% per annumcontinuously compounded. A three-month American call futures option with a strike priceof £28 is worth £4. Calculate bounds for the price of a three-month American put futuresoption with a strike price of £28.
1. The rate of return on a 10 percent coupon bond that is initially purchased at par for $1,000 and sells for $1,100 the next year is ___% 2. The current interest rate on a 10-year coupon bond (with face value = $1,000 and annual coupon rate = 3.25%) is 2.42%. This implies: (there are more than one answer) Question 14 options: the price of this bond is $1,000. the price of this bond is greater than $1,000. the price of this bond is less than $1,000. the buyer of the bond will have a return of 2.42% if she sells the bond next year. the buyer of this bond will receive $32.5 from the bond issuer every year before maturity while holding the bond. 3. True or False? Last year you purchased a bond with an interest rate of 5%. Now the interest rate on the bond market drops to 4%. Then the face value of your bond is lower.
M1
5

Recommended textbooks for you

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Essentials Of Investments

Finance

ISBN:

9781260013924

Author:

Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:

Mcgraw-hill Education,

FUNDAMENTALS OF CORPORATE FINANCE

Finance

ISBN:

9781260013962

Author:

BREALEY

Publisher:

RENT MCG

Financial Management: Theory & Practice

Finance

ISBN:

9781337909730

Author:

Brigham

Publisher:

Cengage

Foundations Of Finance

Finance

ISBN:

9780134897264

Author:

KEOWN, Arthur J., Martin, John D., PETTY, J. William

Publisher:

Pearson,

Fundamentals of Financial Management (MindTap Cou…

Finance

ISBN:

9781337395250

Author:

Eugene F. Brigham, Joel F. Houston

Publisher:

Cengage Learning

Corporate Finance (The Mcgraw-hill/Irwin Series i…

Finance

ISBN:

9780077861759

Author:

Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor

Publisher:

McGraw-Hill Education

SEE MORE TEXTBOOKS